Archer Daniels Midland 2010 Annual Report Download - page 38

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Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Income Taxes
The Company frequently faces challenges from domestic and foreign tax authorities regarding the amount of taxes
due. These challenges include questions regarding the timing and amount of deductions and the allocation of
income among various tax jurisdictions. In evaluating the exposure associated with various tax filing positions, the
Company records reserves for estimates of potential additional tax owed by the Company. As an example, a
subsidiary of the Company received a tax assessment in the amount of $456 million (subject to variation in
currency exchange rates) consisting of tax, penalty, and interest from the Brazilian Federal Revenue Service
challenging the deductibility of commodity hedging losses incurred by the Company in 2004. The Company
evaluated its tax position regarding these hedging transactions and concluded, based in part upon advice from
Brazilian legal counsel, that it was appropriate to recognize the tax benefits of these deductions (See Note 12 in
Item 8 for additional information). Deferred tax assets represent items to be used as tax deductions or credits in
future tax returns, and the related tax benefit has already been recognized in the Company‘s income statement. The
realization of the Company‘s deferred tax assets is dependent upon future taxable income in specific tax
jurisdictions, the timing and amount of which are uncertain. The Company evaluates all available positive and
negative evidence including estimated future reversals of existing temporary differences, projected future taxable
income, tax planning strategies, and recent financial results. Valuation allowances related to these deferred tax
assets have been established to the extent the realization of the tax benefit is not likely. To the extent the Company
were to favorably resolve matters for which accruals have been established or be required to pay amounts in excess
of the aforementioned reserves, the Company‘s effective tax rate in a given financial statement period may be
impacted.
Undistributed earnings of the Company‘s foreign subsidiaries and affiliated corporate joint ventures accounted for
on the equity method are considered to be permanently reinvested, and accordingly, no provision for U.S. income
taxes has been provided thereon. If the Company were to receive distributions from any of these foreign
subsidiaries or affiliates or determine the undistributed earnings of these foreign subsidiaries or affiliates to not be
permanently reinvested, the Company could be subject to U.S. tax liabilities which have not been provided for in
the consolidated financial statements.
Asset Abandonments and Write-Downs
The Company is principally engaged in the business of procuring, transporting, storing, processing, and
merchandising agricultural commodities and products. This business is global in nature and is highly capital-
intensive. Both the availability of the Company‘s raw materials and the demand for the Company‘s finished
products are driven by factors such as weather, plantings, government programs and policies, changes in global
demand resulting from population growth and changes in standards of living, and global production of similar and
competitive crops. These aforementioned factors may cause a shift in the supply/demand dynamics for the
Company‘s raw materials and finished products. Any such shift will cause management to evaluate the efficiency
and cash flows of the Company‘s assets in terms of geographic location, size, and age of its factories. The
Company, from time to time, will also invest in equipment, technology, and companies related to new, value-added
products produced from agricultural commodities and products. These new products are not always successful
from either a commercial production or marketing perspective. Management evaluates the Company‘s property,
plant, and equipment for impairment whenever indicators of impairment exist. The Company evaluates goodwill
and other intangible assets with indefinite lives for impairment annually. Assets are written down after
consideration of the ability to utilize the assets for their intended purpose or to employ the assets in alternative uses
or sell the assets to recover the carrying value. If management used different estimates and assumptions in its
evaluation of these assets, then the Company could recognize different amounts of expense over future periods.